Treasurers should take note of PIMCO’s twist on the LTCM trade.
For a couple of years hedge fund boffins have chattered about the relative merits of the “anti-LTCM trade.” It was a reference to John Meriwether’s hedge fund, which bet big that the debt of various European countries would converge. LTCM expected the single currency project would pull them in line—and it was right—only since it went bust in 1998, LTCM didn’t live to enjoy the payoff.
In the past year, with Mediterranean economies like Greece and Spain under mounting strain, some hedgies have reversed LTCM’s play and bet that the eurozone would split apart, or at least that returns on its members’ debt would diverge.
Bill Gross, boss of massive bond house PIMCO, disagrees. In his latest Investment Outlook, he predicts that the pending bailout of Greece will cause spreads on European government bonds to converge again. But there’s a twist: this time it will be because of the degradation of the credit of the bailers, notably Germany and France, as well as because of improvement in the credit of Greece and any of the other PIIGS that come to the trough. Other sovereign bailouts, such as Dubai’s, will have similar effects in other regions.
If Mr. Gross is right, this could be an important topic for treasury investment managers. It means the traditional line between sovereign debt and agencies on the one hand, and corporates and covered bonds on the other, will become less distinct, leading to what he describes as more of a “unicredit” market.
Granted, the blurring of the line between, say, iron-clad German bunds and the rest of the eurozone rabble would make a previously safe haven somewhat less so, but it could also increase the availability of higher-quality spread product that might be suitable for parking cash. Germany, after all, will remain the engine of the eurozone. If treasurers can park cash in its securities and reap a higher return because of the effect of its Greek commitments on its credit, all the better.